First Time Home Buyer – Down Payment & CMHC

To continue on with the First Time Home Buyer series from last week, I’d like to talk a little about the down payment required for the first time home buyer. There are many options available in Canada for down payments, but the general rule of thumb is, the higher your down payment, the less you pay in terms of fees to obtain your mortgage.

Canada Mortgage and Housing Corporation (CMHC)

You’ve probably heard of CMHC insurance, which is the insurance given to banks so that they can lend to borrowers with less 25% down with reduced risk. Remember, you, the borrower pays for CMHC (<25% down), but the bank benefits. The extra premium does not insure the borrower what so ever. In addition to the CMHC fee, there typically an application fee.

Here are the CMHC fees by level of down payment:

% Down CMHC Fee Cost/$100k Mtg
5% 2.75% $2,750
10% 2.00% $2,000
15% 1.75% $1,750
20% 1.00% $1,000
25% $0 $0

There is a handy mortgage qualifer web based calcultor on Dinky town that accounts for CMHC etc. A useful tool for those in the real estate market.

Needless to say, the more cash you have for your down payment, the lower your fees! Perhaps a prudent plan for a new grad is to maximize your RRSP, when you get $20,000 accumulated, use the RRSP Home Buyers Plan for the down payment.

I’ve recently read that the Canadian government is in the process of passing legislation that will reduce the minimum down payment required to avoid the CMHC fees from 25% -> 20%. According to CBC, this legislation took into effect Friday April 20, 2007, so my above numbers may not be accurate. I will be posting more about the new down payment rules tomorrow.


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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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14 years ago

Investiod said: “I don’t think that salaries are double in places that have double the housing costs. Many national companies (as well as government workers) do not discern where you live, your salary is the same regardless.”

I agree with that, however, there is some recognition of the differences in a number of ways. For instance, the federal government generally pays higher wages for the same qualification, than do most of the provinces, possibly recognizing that many employees are going to be in more expensive locations. This of course benefits the employee who works in a smaller centre. The government of Alberta pays it’s employees (generally) higher wages that the equivalent positions in some (most) other provinces. In addition even in national companies, often the higher paid positions are placed in the higher cost cities, or the positions are reassessed to allow for the difference in costs (i.e. the secretary becomes the EXECUTIVE secretary). While salaries have not matched the recent increases in housing costs in some cities, there are adjustments.

Another example: Tim Horton’s pay staff far more in Calgary than in St. John’s. They have to, simply to obtain staff!

Finally, often the housing availability differs. In St. John’s, there is little high density housing. In Vancouver, there’s lots. The differing costs of building allow (cause) the homeowner to invest in a different form of housing. In St. John’s, one has little choice but to purchase a single family dwelling, so that becomes the norm even if a SFD is not the most sensible choice.

14 years ago

Monty said: “I cringe when I think about having to get a mortgage in high priced Calgary, Vancouver, Toronto etc.”

Yup, due to my employment choice, my wage is the same no matter where in this province I live. That factored heavily in my decision of where I choose to live & work. The savings on housing, commuting, etc., allow me to use those savings for other lifestyle purposes, including investing for a VERY comfortable retirement.

14 years ago

Monty – congrats on having your house paid off!

David, I don’t think that salaries are double in places that have double the housing costs. Many national companies (as well as government workers) do not discern where you live, your salary is the same regardless.

The geographical difference is intriguing, but I think it addresses what the CMHC insurance is there for – to protect lenders in the event of a default. I think a more complicated means-based formula is appropriate, but from their perspective I am sure they don’t want to do that much work for something that is mandatory for each home buyer.

Monty Loree
14 years ago

I agree that a $500,000 mortgage is out of reach for most people starting out.

However, in Calgary, it’s really hard to find a place for less than $200,000.

That would require $40,000 down. That’s still quite a bit of $$$ for people starting out.

How would you guage something like ability to pay?
That’s pretty complex. You would have to evaluate employed, self employed, unemployed.

I am thankful that I live in Regina and that my house is long since paid for. I cringe when I think about having to get a mortgage in high priced Calgary, Vancouver, Toronto etc.

14 years ago

Monty asks: “Should the feds take these geographical price differences into account?”

Or, should CMHC simply look at ability to pay? It really should not matter what city you live in. Presumably, in a more expensive city, wages would reflect that price difference, making the downpayment as difficult to realize in either place. While I realize that some salaries are standardized across the country, and some are close, due to mobility of the worker, many other wages are based in large part on the costs of living in a location.

Also, the best CMHC fee is now available at 20%, so the $500,000 house now needs $25,000 less than you indicated. Furthermore, I believe that the CMHC fees are largely to support first-time homeowners entering the market, as many others should have some equity in their homes. Even in the cities you name, I do not accept that a person looking for a first home should be considering a $500,000 dwelling. Other options would be better considered.

Monty Loree
14 years ago

So… the feds have a declining scale for people with more cash to put down on a mortgage.

The problem is that real estate pricing is extremely high in Calgary, Vancouver, Toronto…

25% on a $500,000 house is $125,000 in order to get the best CMHC fee. $500K is not unreasonable to buy a house in the major cities. That’s kind of steep for first time buyers.

Prices in Regina, St John, NF, Halifax are far less than these expensive cities.

Should the feds take these geographical price differences into account?

14 years ago

“kind of implies that the government acknowledges that homes are less affordable now than before”

Or that the likelihood of default by a borrower at 80% is the same as one at 75%. I think that the change relates as much to current earnings ability, and the responsibility level of borrowers, as home affordability.

In either case, it will be great for those who are “that close” to having 25% down before taking the plunge, to be able to step into the market now, rather than later.

14 years ago

One important point to add regarding the new 20% threshold for mortgage insurance: those wanting to use the Smith Manoeuvre should now be able to get an investment line of credit up to 80% of the value of their home instead of the previous 75% maximum.